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Breaking the Implicit Contract: Using Pension Freezes to Study Lifetime Labor Supply

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Abstract

This paper studies the elimination of traditional pensions and subsequent adoption of 401(k) plans by U.S. employers. Using thousands of firm-level natural experiments, it shows that unexpected losses in future compensation engendered by pension plan transitions induce premature retirement for some workers and delayed retirement for others. Observed heterogeneity in retirement behavior is indicative of differences in wealth and in preferences for leisure. Using credibly identified treatment effects as estimation targets, it fits a structural model of retirement and uses the model to evaluate the effect of a counterfactual reform that eliminates Social Security payroll taxes for older workers.

Suggested Citation

  • Dhiren Patki, 2021. "Breaking the Implicit Contract: Using Pension Freezes to Study Lifetime Labor Supply," Working Papers 21-7, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:92873
    DOI: 10.29412/res.wp.2021.07
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    References listed on IDEAS

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    1. Matias Busso & John DiNardo & Justin McCrary, 2014. "New Evidence on the Finite Sample Properties of Propensity Score Reweighting and Matching Estimators," The Review of Economics and Statistics, MIT Press, vol. 96(5), pages 885-897, December.
    2. Chichun Fang & Charles Brown & David Weir, 2016. "Cohort Changes in Social Security Benefits and Pension Wealth," Working Papers wp350, University of Michigan, Michigan Retirement Research Center.
    3. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, vol. 57(5), pages 1027-1057, September.
    4. Ron S Jarmin & Javier Miranda, 2002. "The Longitudinal Business Database," Working Papers 02-17, Center for Economic Studies, U.S. Census Bureau.
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    More about this item

    Keywords

    labor supply; pensions; retirement savings; Social Security payroll tax;
    All these keywords.

    JEL classification:

    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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